WealthManagement Magazine

Drunk on Booze Stocks

Benjamin Franklin once said, Beer is proof that God loves us and wants us to be happy. My how tastes change. Today, Ben might substitute Absolut Raspberri or shiraz for beer. Booze and wine have replaced ordinary suds as the king of cool. Sure, there has never been a better time to be a beer drinker in the U.S. Walk into any bar and you will often be confronted with a bewildering choice of tap handles.

Benjamin Franklin once said, “Beer is proof that God loves us and wants us to be happy.” My how tastes change. Today, Ben might substitute Absolut Raspberri or shiraz for beer. Booze and wine have replaced ordinary suds as the king of cool.

Sure, there has never been a better time to be a beer drinker in the U.S. Walk into any bar and you will often be confronted with a bewildering choice of tap handles. But walk into the very happening restaurant Prune in the very happening East Village neighborhood of New York City and you can pick not one but 12 versions of Bloody Marys with brunch. You can't toss a corkscrew in Manhattan without hitting a wine bar, and svelte patrons of sleek lounges avoid beer bloat by sipping on lower-carb vodkas or aged tequilas.

Another sign of the times: The Sunday Styles section in The New York Times features a column called “Shaken and Stirred,” which highlights recipes for fresh new concoctions made of high-end liquors, exotic juices and herbs and interviews people with titles like “director of cocktail development.”

Beer? Let's just say beer drinkers are still struggling to get the respect their beverage deserves.

And as consumer tastes go, so goes it on Wall Street. Booze- and wine-heavy stocks like Diageo, the world's leading spirits maker and producer of such names as Tanqueray gin and Johnnie Walker scotch, and Constellation Brands, the biggest winemaker in the world, are up a respective 21 percent and 57 percent from 52-week lows last August. In contrast, Anheuser-Busch, which controls about half of the U.S. beer market, has seen its stock sink 11 percent since the end of August. During the same time, the broad S&P 500 index has grown 7.9 percent.

“There's been a lot of innovation and new product introductions in the spirits industry in the past couple years,” says Tiziana Mohorovic, a spokesperson for Adams Beverage Group, a Norwalk, Conn., market research group for the alcoholic beverages industry. “If you look at beer, there hasn't been much in the way of innovation, with the exception of the imported beer market, and low-carb diets had an impact on beer as well.”

While New York may be somewhat ahead of the curve in its penchant for booze and wine, beverage analysts say the yen for the hard stuff is apparent from coast to coast — thanks in part to aggressive advertising on the part of the liquor industry. The trend is now stretching overseas, also helping boost booze makers' bottom lines. According to Adams Beverage Groups, spirit volume grew 4.1 percent last year, while sales of wine grew 3.4 percent. Beer sales were nearly flat, edging up 0.7 percent.

The booze and wine boom is symptomatic of a larger phenomenon. “Fifteen years ago, no one in the U.S. but a few people in New York knew what sushi was. Today, everybody knows what sushi is — it's the globalization of taste and sophistication, and those things are driving growth in the wine and spirits industry,” says Timothy Ramey, analyst in Portland, Ore., for D.A. Davidson.

Indeed, drinkers are willing to pay more for upscale liquors, and are quaffing it in greater quantities. According to Bryan Spillane, analyst at Banc of America Securities, superpremium spirits that in 1970 made up 4 percent of the market now account for upwards of 20 percent.

The Liquor Fad?

But will vintner and distiller stocks go the way of the now-passé Cosmopolitan?

Eric Bjorgen, director of research for The Leuthold Group in Minnesota and a manager for Leuthold Weeden Capital Management's Select Industries portfolio, says distillers and vintners currently rank 14th out of 150 in quantitative rankings of the industries they track, and that the stocks make up about 2 percent of Leuthold's equity portfolio. (Considering the sector makes up only 0.10 percent of the S&P 500, it is a significant overweight on the industry.) Leuthold currently owns Constellation Brands, Diageo and Brown-Forman.

Leuthold likes the dividend yields on the stocks, their defensive nature, and reasonable — if not cheap — valuations. “Value is not one of the reasons we're here — P/Es are not out of hand, but with defensive groups you want to see single digits or low teens,” Bjorgen says. “But, we're seeing excellent growth characteristics for this group right now, as well as above average insider buying.”

M&A potential in the sector also has booze bulls excited right now — even beyond the proposed $14 billion acquisition of Britain's Allied Domecq by French spirits company Pernod Ricard. Constellation and Brown-Forman have also put in a bid for the company. “M&A is strong in this area, and there are still a lot of privately held companies out there that might be takeover candidates,” says Bjorgen. Another plus for vintners is a recent Supreme Court ruling that struck down laws restricting wineries' interstate sales direct to consumers.

That said, much of the easy money may already have been made. Spillane recommends a “market weight” on the beverage sector and sees a price appreciation potential in the sector of 5 percent; he has price targets on buy-rated Diageo of $64 and on Constellation of $30. Diageo closed June 8 at $59.29, while Constellation stood at $28.20.

For those with a contrarian bent and a longer investment horizon, some think now may be a perfect time to take advantage of lower prices in beer stocks. Morningstar analyst Matthew Reilly gives Anheuser-Busch a top five-star rating and has set a fair-value estimate on the stock, which closed June 8 at $47.55.

The company has half of the American beer market and an exclusive distributor base in the U.S. that Reilly says would be “practically impossible to duplicate.” He also likes what the brewer is doing in China — the world's largest beer market — where it has taken a stake in Tsingtao, bought Harbin (the country's fourth-largest brewer) and is positioning the Budweiser brand as a high price-point premium import.

“I'm not expecting 2005 to be a great year for any of the brewers, and the sector is a bit beat up right now,” says Reilly. “But it's the next five years we're really focused on, and in their history, every time Anheuser-Busch is challenged, they rise to the occasion.”

Buoyed Spirits
A small sampling of vintner and distiller stocks.
Company Name Ticker Recent Price 52-Week High/Low P/E Ratio Estimated Earnings Growth Over Last Fiscal Year (2006)
Diageo DEO $58.95 $61.23/$48.21 14.59 8% (fiscal year ending June 2005)
Constellation Brands STZ 28.26 30.08/17.70 23.58 14% (fiscal year ending Feb. 2006)
Anheuser-Busch BUD 47.34 54.74/44.85 17.13 7% (calendar year)
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